The IRS issued Notice 2026-16, providing interim guidance on a new 100% depreciation deduction for qualified production property (QPP) created by the OBBBA. This allowance applies to manufacturing-related real property placed in service between July 2025 and December 2030, drastically accelerating tax benefits for qualifying businesses.
IRS Releases Interim Guidance on New QPP Depreciation Deduction
A new but temporary special depreciation allowance for qualified production property (QPP) was created by last year’s One Big Beautiful Bill Act (OBBBA). Under previous law, taxpayers had to depreciate such property over a 39-year period. The OBBBA allows taxpayers to elect a deduction equal to 100% of the property’s adjusted basis in the tax year it is placed in service—effectively functioning as bonus depreciation for certain buildings and production facilities.
The IRS recently issued interim guidance via Notice 2026-16 that taxpayers can generally rely on until proposed regulations are published. This notice clarifies several important issues related to claiming the deduction.
What is the QPP Depreciation Deduction (OBBBA)?
The QPP deduction is a highly beneficial tax provision available for certain manufacturing-related real property placed in service after July 4, 2025, and before January 1, 2031. It allows businesses to dramatically accelerate their depreciation timeline, freeing up cash flow for further investment.
Identifying Qualified Production Property (QPP)
To take advantage of this deduction, your property must meet strict IRS definitions. The guidance defines QPP as any portion of nonresidential real property that meets the following criteria:
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It is subject to the Modified Accelerated Cost Recovery System (MACRS).
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It is used by the taxpayer as an “integral part” of a qualified production activity (QPA).
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It is placed in service in the United States or any of its territories.
Additionally, the property’s construction must begin after January 19, 2025, and before January 1, 2029. The original use generally must begin with the taxpayer, though certain used property may qualify under special rules.
Requirements for Nonresidential Real Property
The guidance specifies several types of ineligible property. You cannot claim this deduction for property used for:
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Offices and administrative services
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Lodging and parking
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Sales, research, software development, or engineering activities
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Storage of finished products
For properties with mixed uses, taxpayers may use any reasonable method to allocate the unadjusted depreciable basis between eligible and ineligible space. Reasonable methods include utilizing square footage, cost segregation data, architectural plans, or process diagrams.
The “Integral Part” Rule and Integrated Facilities
Property is considered an integral part of a QPA if the activity takes place within its physical space. Generally, each unit of property must satisfy this requirement independently. However, the IRS provides an exception for “integrated facilities.”
Taxpayers can treat multiple properties that operate together on contiguous land as a single unit. For example, if a manufacturer builds a new storage facility for raw materials that supports two adjacent factories, all three buildings constitute a single unit of property. Furthermore, a de minimis rule applies: if 95% or more of a property’s space meets the requirement, the entire property can be treated as qualifying.
What Qualifies as a Qualified Production Activity (QPA)?
A QPA encompasses the manufacturing, production, or refining of a qualified product that results in a “substantial transformation.” This generally applies to any tangible personal property (excluding food or beverages prepared and sold in the same building).
The IRS interprets the term QPA broadly, defining substantial transformation as turning raw materials and subcomponents into a fundamentally different, distinct final product. A QPA can also include:
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Essential Activities: Receiving and storing raw materials utilized during production.
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Related Activities: Oversight and direction of the manufacturing process.
Note: The IRS explicitly limits the term “production” to activities within the agricultural or chemical industries.
Maximize Your Tax Break with Strategic Planning
The interim guidance also introduces special rules, election procedures, a safe harbor for property placed in service in 2025, and strict depreciation recapture rules if a property’s use changes within 10 years.
Navigating the complexities of MACRS, basis allocation, and OBBBA regulations requires precision. The team of CPAs and advisors at The CJ Group is ready to help you evaluate your eligibility. Through our comprehensive tax planning and advisory services, we can help you implement cost segregation studies, correctly identify QPP, and maximize this new tax break.
Ready to accelerate your depreciation deductions? Contact us today to schedule a consultation with our tax specialists.
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